management consulting &

property assessment Professionals

Heuristic Consulting Associates BC Ltd 

Why is an understanding of the impact on property value important to decisions about infrastructure?
The Organization for Economic Cooperation and Development states that infrastructure is key to economic and social development. “Infrastructure promotes prosperity and growth and contributes to quality of life, including the social well-being, health and safety of citizens, and the quality of their environments.”[1]

Residential and non-residential property values implicitly reflect these factors, so that infrastructure investment decisions may be better informed by considering their potential impact on property values.

The current great concern over the need for whole-life asset management tends to create a public mindset focused on the massive cost of infrastructure.  Real estate professionals can play a critical role in articulating the long-term benefits of infrastructure and their impact on property value.

Developers, investors, homeowners and municipalities benefit from understanding the importance of infrastructure investment to preservation or enhancement of property values.

Local government’s critical role in infrastructure investment and preserving property value

In 1793, Canada’s first Assessment Act introduced property tax that enabled local governments to pay for infrastructure like roads and property services such as fire protection. In that day, this made good sense as most wealth was in land and the provision of infrastructure and property services both preserved property value and grew wealth. Likewise the construction of railway infrastructure was critical to the growth of wealth and development of Canada as a nation.

In modern Canada, we find that provision of property services related to wealth creation and sustainable prosperity continue to be embedded in local government finance - from development charges and the property tax, to user fees and the gas tax.

Taxpayer-funded infrastructure may often be controversial[2], but it is essential to attract private investment necessary for economic growth and to both preserve and grow the value of investments in our communities, our homes and our businesses. Taxpayers benefit from increased wealth and taxing authorities may adopt policy to benefit from tax base growth.[3]

When cities improve the energy efficiency of their buildings, they save their taxpayers money. When they invest in modern low-carbon infrastructure, they raise their residents’ standard of living. Taken together, these actions make cities more attractive to businesses and investors. … The market cannot accurately value companies, and investors cannot efficiently allocate capital, without reliable data on the risks they face. What Paris Talks Have Accomplished So Far. Michael R. Bloomberg, former Mayor of New York City. December 6, 2015.

http://www.bloombergview.com/articles/2015-12-06/what-paris-talks-have-accomplished-so-far

It remains a primary function of local governments to enable sustainable prosperity and wealth building in their communities. Investing in service provision and infrastructure makes each municipality more attractive to private investment and to residents as a place to live.

For example, local governments create infrastructure such as parks and recreation facilities that make a community more desirable for families and people of all ages. Roads connect our neighbourhoods and provide access to amenities so that our properties are more valuable than without those services. Utilities (water, sewer, hydro, gas, and telecommunications) are essential infrastructure that we may take for granted but their absence or significant deterioration makes our home less valuable.

Business value is enhanced and private investment for economic growth is encouraged through infrastructure investments. Transit and commercial core infrastructure/downtown revitalization attract more people into business areas with the intent of increasing sales, reducing vacancy rates and thereby enhancing property values and the tax base. Industrial and employment lands are more valuable when they are provided with infrastructure necessary for competitive commercial and industrial operations.

Infrastructure and property value – what is the problem?

So, if infrastructure is critical to preserving our lifestyles and growing our community and individual wealth, why today has infrastructure become such a priority - debated in council chambers and reported in the media?

The Federation of Canadian Municipalities (FCM) describes the problem in the following terms:

For 25 years Canadians have watched the symptoms of the infrastructure deficit grow: rusting bridges, crumbling roads, crowded buses and subways, and thousands of drinking water warnings.

How has this happened? Revenue imbalance. Municipalities own over 60% of the country's infrastructure but collect just eight cents of every tax dollar paid in Canada, with the other 92 cents going to federal, provincial and territorial governments.

On their own, municipalities don't have the revenue tools to rebuild infrastructure, especially while they are expected to meet growing needs for policing, housing, the environment and immigrant settlement, including many responsibilities downloaded from other governments.[4]

 Can an understanding of infrastructure’s impact on property values help in developing policy, testing options and implementing solutions?

The infrastructure challenge has led to exploration of a number of financing innovations, an emphasis on the need for long-term financial planning and development of a whole-life perspective related to asset management. More effective asset management has been encouraged by changes to Public Sector Accounting Board standards, requiring municipalities to include asset depreciation allowances as well as acquisition or construction costs in their financial statements.

Concepts like sustainable prosperity, smart growth and sustainable infrastructure are some of the policy and strategic asset management responses to date. Such concepts and related built environment decisions may be better understood in the context of how they preserve or put at risk the value taxpayers have invested in their homes and businesses.

Smart growth: 
‘Smart growth’ arose out of the development pattern set out by Jane Goodall over 40 years ago. It promotes necessary growth in ways that leverage existing infrastructure and are less wasteful of resources. Advocates argue that smart growth developments conserve resources (land, infrastructure and materials) and increase property values.[5]

Critics, on the other hand, contend that smart growth policies lead to higher house prices by rationing land (such as with urban growth boundaries). Higher house prices lead to less discretionary income for households, so that there is less money for other goods and services, lowering employment levels. The resulting densification leads to more intense traffic congestion, with resulting economic losses and more intense air pollution, which is less healthful.[6]

Such interesting debate could be made more persuasive and arguments more compelling were they supported by market evidence concerning the variables that influence property value.

Eco-asset strategy:
In 2014, the Town of Gibsons, BC became the first municipality in North America to pass a municipal asset management policy that defines and recognizes natural (vs. engineered) assets as an asset class, and specifies obligations to operate, maintain and replace natural assets alongside traditional capital assets.

Valuation is important to this process as the municipality needs to recognize the natural asset worth – generally in terms of civil services and substitution costs, if replaced with engineered alternatives.

Viewing natural assets as critical infrastructure offers the potential advantages of enhancing property value through green branding, reducing infrastructure costs (capital and operating) and preserving the environment.

Using property valuation information to help answer challenging infrastructure questions

Infrastructure poses many challenging questions for decision-makers and taxpayers. The answers to these questions are more complete when they address how each option preserves our property values and offer opportunities for sustainable wealth creation in our communities.

The following questions may be better answered where decision makers consider the impact of infrastructure investment on property value:
To what extent do existing policies and investments in infrastructure preserve and grow the value of our investments in our homes and businesses? To what extent might property values decline with deterioration of infrastructure?
Is infrastructure investment in our communities sufficient to provide opportunities for continuing wealth creation in a global market place? How does infrastructure investment (or lack thereof) impact local and foreign direct investment in our communities?

For example, does it make sense for a fringe community in a high growth area to invest in a modern water system or risk becoming the next Walkerton?
If our community’s sewage treatment system is old and does not meet current regulatory requirements, is the potential degradation in property value greater than the $1,000 per property per year charge to upgrade the system? Should decision criteria focus on capital cost or include a quantification of potential loss to investments in our homes and businesses?

How will climate change affect the value of our properties? Is our infrastructure investment sufficient to preserve our property values from climate change impact?

Should our community develop a risk profile for major drivers like climate change to help decision makers and taxpayers weigh costs against the potential impact on our property values and the environment?
Are there opportunities – such as in the Town of Gibsons – to incorporate nature’s assets as an integral part of strategic asset management to reduce capital and operating costs, enhance our property investments and protect our environment? To what extent might such green branding enhance our property values and build the tax base?

How might infrastructure investments on First Nations’ lands complement neighbouring jurisdictions and encourage private investment, greater wealth and increased property value for all communities?
How might communities use impact on property value information to help prioritize infrastructure decisions in their asset management frame – and better understand the distinctions between criticality, consequences and risk[7]?

What tools assist in understanding the impact of infrastructure investment on property value?

Generally accepted valuation practices for single-property appraisal are increasingly adapted to mass appraisal using technology that incorporates ‘big data’ and employs methods like Hedonic price models. Hedonic price methods are commonly used in mass appraisal throughout North America in applications ranging from property tax assessment to investment portfolio analysis and ecosystem valuation. Their basic premise is simply that the price of a marketed good is related to its characteristics, or the services it provides. So, as with traditional single-property appraisal, various property characteristics (e.g., physical, environmental, economical, legal/regulatory) are modelled and results analyzed to estimate the influence of various factors on property value.

Conclusion
Homeowners, investors and taxpayers perceive property value through economic, social, environmental and cultural lenses. Understanding the short and long-term impact on property value of infrastructure investments can provide a logical lens and standard metrics to foster common understanding and more informed decision-making.

Balancing the costs of infrastructure investment against benefits of preserving property values can aid in prioritizing asset investment requirements. Knowledge of potential for loss or gain in property value may result in greater public support for infrastructure investment – to sustain livable resilient communities, and leverage the ‘beautiful BC’ environment in a competitive global economy.


[1] Organization for Economic Cooperation and Development (OECD). Strategic Transport Infrastructure Needs to 2030.
[2] Frances Bula. Vancouver-region voters reject sales-tax hike to fund transit projects.
 The Globe and Mail. July 3, 2015. Website URL:  http://www.theglobeandmail.com/news/british-columbia/transit-results/article25228292/ 
[3] Property tax continues to be the greatest source municipal revenue across Canada.
[4] Federation of Canadian Municipalities. Infrastructure: About the Issue. Website URL: http://www.fcm.ca/home/issues/infrastructure/about-the-issue.htm
[5] Deborah Curran. A Case for Smart Growth. West Coast Environmental Law - 2003. Website URL: http://www.wcel.org/sites/default/files/publications/A%20Case%20for%20Smart%20Growth.pdf
[6] Wendell Cox. Questioning the Messianic Conception of Smart Growth. New Geography. June 28, 2012. New Geography. Website URL: http://www.newgeography.com/content/002934-questioning-messianic-conception-smart-growth
[7] Criticality in these terms generally defines priorities based on the consequence of failure. Risk is the likelihood of an unpleasant costly event.